The euro clearing business is worth £880m a day to the City of London.
Photograph: Rex/Shutterstock

London is facing renewed pressure over its dominance of the €1tn (£880bn)-a-day euro clearing market after the European Central Bank set out proposals aimed at giving it more oversight of the lucrative business.

The move by the Frankfurt-based ECB – the central bank for the 19 countries using the euro – follows a report by the European commission that called for the EU to have more powers over clearing of financial products denominated in euros after Brexit.

The City dominates the market in clearing, a process which is supposed to reduce the risks in complex financial transactions by matching buyers and sellers as well as reducing the cost of trading, through the use of clearing houses.

What is euro-denominated clearing?

Euro-denominated clearing refers to the trade of financial products, such as derivatives priced in euros. Clearing houses act as buyer and seller in these trades. They agree to take on the risk of a default​, on behalf of the actual buyers and sellers such as investment banks​, in exchange for a payment. London clearing houses dominate the euro side of things, ​dealing on a daily basis with €1tn ​of foreign-exchange contracts (​converting an amount of euros into another currency), compared with €400​bn in New York.

The business has been hotly contested since the EU referendum a year ago, when Xavier Rolet, chief executive of the London Stock Exchange, warned that 100,000 jobs across the UK were at risk if the City lost the ability to process euro-denominated transactions.

In an announcement on Friday, the ECB said its governing council was setting out a recommendation to have more oversight of the business.

Using the technical term for clearing houses – central counterparties – the ECB made clear that London was in its regulatory sights, as it demanded “clear legal competence in the area of central clearing”. The bank said: “These powers include a significantly enhanced role for central banks of issue in the supervisory system of central counterparties, in particular with regard to the recognition and supervision of systemically important third-country CCPs clearing significant amounts of euro-denominated transactions.”

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It builds upon the report from the European commission earlier this month which fell short of forcing the relocation of euro clearing after Brexit but would allow tougher regulation of “systemically” important amounts of trade being conducted by clearing houses outside the remaining 27 members of the EU.

In a speech this week, Mark Carney, governor of the Bank of England, outlined the scale of the clearing market. He said the London Clearing House (LCH) clears swaps – a form of financial instrument – in 18 currencies for companies in 55 jurisdictions, handling more than 90% of cleared interest rate swaps globally and 98% of all cleared swaps in euros.

He argued that pushing business through clearing houses reduced the risks in the markets. “Prior to the crisis, derivative transactions created a complex, opaque – and dangerous – web of exposures that helped turn a shock into a panic,” Carney said the speech to an audience at the Mansion House.

He said clearing houses also reduced the cost of business. “Any development which prevented EU27 firms from continuing to clear trades in the UK would split liquidity between a less liquid onshore market for EU firms and a more liquid offshore market for everyone else,” he added, warning that the costs would be passed on to households and businesses.

The argument about where euro clearing should take place raged even before the referendum. George Osborne, when he was chancellor, had taken the matter to the court to fight an attempt by the ECB to argue that clearing houses – such as the LCH – should be based in the eurozone when they handle trades in euros. In 2015, the general court of the EU had ruled that the ECB did not have the power to demand such a move.

The euro clearing issue is one of many competitive threats to the City in the wake of the Brexit vote. Europe’s pre-eminent financial centre is also battling to retain major investment banks – from Goldman Sachs to UBS – that are openly considering moving British-based operations to the EU.